Updated 11/26/19 Originally posted 10/1/18
After over a decade in the TOLI (trust-owned life insurance) business, we are aware of trends that come and go. One trend we are seeing more and more lately is the use of directed TOLI trusts.
Directed trusts divide the responsibilities of the trust into two distinct tasks – administration and asset management. Directed trusts are not new in the industry. Once, all trustees retained full authority over both the administration of the trust and the management of the trust asset, but as the trust and financial services world evolved, responsibilities blurred. Today it is not uncommon to have the trust administration performed by a trust company with the asset management overseen by an outside firm with no relationship to the trust company.
The Good and the Bad
In theory, directed trusts are the best of both worlds – each responsible party doing what they do best. In reality, that is not always the case. While some TOLI trustees simply do not have the requisite skills to manage the asset in the trust and outside help would be a blessing, we have found that often the person named as the manager of the policy does not either – or if they do, they are not really paying attention to the trust. Perhaps the person named is a layperson, a relative or friend selected by the grantor, or maybe it was the agent who sold the policy who once the sale was made lost interest.
Certainly, this is not always the case and in a perfect world, with the advisor present and knowledgeable, the outcome can be enhanced. In those cases, the trustee is protected against claims resulting from carrier solvency and product performance and maintenance and the advisor remains relevant in the relationship, resulting in a better outcome for the present policy and perhaps future sales for the advisor – a win/win.
But there are real pitfalls with directed TOLI trusts. The policy owner (trustee) controls access to the carrier and policy information which can complicate the service and policy management duties of an advisor without direct access to carrier information. Some advisors fail to realize the magnitude of their fiduciary duty, a changing world for advisors relying on sales for revenue, but one trustees are used to. With many advisors reaching retirement age (the average age for both financial and insurance advisors is approximately 60) one growing issue is the failure of the TOLI advisor to resign and appoint a replacement when they retire or are no longer capable of serving. Sometimes, the advisor is not named or is unresponsive, creating a burden for the trustee and leaving the investment management of the trust in limbo. We have even run across grantors unaware their trusts were directed.
For those grantors looking for the best of both worlds, we can offer a solution. At the Life Insurance Trust Company, while we prefer full discretion over the trust asset management, we also work seamlessly with outside advisors. The only trust company focused solely on ILITs, we are backed by the service engine of ITM TwentyFirst, the largest manager of life insurance policies in the US, making us uniquely qualified to serve in any capacity, even as the named investment manager of directed ILITs.
If there is an outside investment advisor, we have proven we can work in partnership to ensure the trust administration and investment direction provides the beneficiaries with the maximum value of the trust asset. Our staff and servicing team can play a supportive role, providing the advisor with an efficient process.
Where it is appropriate, the Life Insurance Trust Company can be named co-trustee with an outside advisor, providing the continuity and direction needed for TOLI trust success.
Directed trusts will play a role in trust-owned life insurance going forward. At the Life Insurance Trust Company, we have the flexibility, knowledge, and experience to produce a successful outcome for any ILIT – directed or not.
If you would like additional information on directed TOLI trusts or the Life Insurance Trust Company, please contact Leon Wessels at 605.574.1703 or firstname.lastname@example.org.